Tax Treatment of Undocumented Immigrants in California

• Publication year: 2021
• Author: By Gi Jung Nam and Ellen Swain

Tax Treatment of Undocumented Immigrants in California

By Gi Jung Nam and Ellen Swain¹

I. INTRODUCTION

Are undocumented immigrants required to pay taxes and how do they pay taxes? This is a question worth answering to correct misconceptions and to understand how undocumented immigrants comply with the tax laws. Undocumented immigrants are individuals who reside in the U.S. without government documentation showing that they are authorized to reside or stay in the United States (i.e., entered the U.S. without legal documentation or staying with an expired temporary visa.)² According to the Center for Migration Studies, California was home to around 2.3 million undocumented immigrants in 2018.³ New American Economy, a bipartisan research and advocacy organization, reported using data for the 2018 year that undocumented immigrants paid a total of approximately $7 billion in taxes: $4.5 billion of federal taxes and $2.25 billion of state and local taxes.⁴

As discussed below, the current law requires undocumented immigrants to pay federal and state income taxes despite receiving fewer tax credits and benefits than other residents with a social security number (SSN). Undocumented immigrants are required to pay taxes because residency for federal and state income tax purposes generally does not consider the immigration status of the individual. The Internal Revenue Service ("IRS") issues an Individual Taxpayer Identification Number ("ITIN") to undocumented immigrants upon filing of an application and supporting documents. Both the IRS and the Franchise Tax Board ("FTB") allow undocumented immigrants to use the ITIN to file and pay their taxes.

II. RESIDENCY

A. Federal Residency Status for Income Tax Purposes

For federal income tax purposes, the Internal Revenue Code ("IRC") provides that an alien (an individual who is neither a citizen nor national of the U.S.) is classified as a resident alien if the individual meets either: 1) the lawful permanent resident test, or 2) the substantial presence test.⁵

The lawful permanent resident test classifies aliens who are lawful permanent residents or "green card holders" of the U.S. at any time during the calendar year as resident aliens.⁶ Undocumented immigrants do not have legal presence in the U.S. and by definition do not satisfy the lawful permanent resident test.

Undocumented immigrants are classified as resident aliens by meeting the substantial presence test.⁷ An individual meets the substantial presence test if she is physically present in the U.S. for at least 31 days during the current year, and at least 183 days during the current year and prior two years combined including: (1) all the days present in the current year, one-third of the days present in the first year before the current year, and one-sixth of the days present in the second year before the current year.⁸ Undocumented immigrants are classified as resident aliens under this test because many of them are physically present in the U.S. for the required amount of days. As resident aliens for federal income tax purposes, undocumented immigrants are generally taxed the same way U.S. citizens are taxed.⁹

B. State Residency Status for Income Tax Purposes

For California state income tax purposes, Revenue and Taxation Code ("RTC") provides that every individual subject to tax under the California Personal Income Tax Law must make a return specifically stating items of gross income received from all sources and the deductions and credits allowable.¹⁰ California's residency law does not consider an individual's immigration status to determine residency.¹¹ Rather, the RTC provides that a resident is any individual who is either in California for other than temporary or transitory purposes or domiciled in California, but who is outside California for temporary and transitory purposes.¹² Therefore, undocumented immigrants physically present in California are considered residents and are taxed in the same way as any other resident of California.

III. ITIN

To file a federal income tax return, an individual must furnish an identifying number on the tax return.¹³ An identifying number may be an SSN or an ITIN issued by the IRS.¹⁴ Generally, only citizens and individuals who are legally...